Why currency changes value?
Money makes the world go around, and lots of things can impact the value of that money. You can’t control any of these factors that change the value of money, but you definitely need to understand what they are so that you can make tactical decisions about when to buy or sell a particular currency.
Currency, just like any other item that is bought or sold, can be impacted by the basics of economics and the business cycle. The laws of supply and demand are just as valid when talking about the value of currency as they are when talking about the value of any commodity.
When the supply of a particular currency is high, the price for that currency goes down as holders of the currency try to find ways to get rid of it. For example, if everyone decides that they don’t want to hold US dollars anymore and tries to sell them, to do so they would likely have to lower their price to find a buyer. In this case, there is more supply than demand.
You can compare this to the sale of real estate in your neighborhood. When there are a lot of houses on the market, they may sit unsold for many months. If someone must move because of a job change or some other reason, that person will likely price his or her home to sell to get it sold more quickly.
Conversely, when the supply of the currency is low and there are more people who want to buy it than there is currency available, the price of the currency goes up as buyers compete for the currency. In this case, there is more demand than there is supply. Using the same comparison, you can relate this to home sales in your neighborhood. When there are few homes available, buyers will offer the full asking price and sometimes bid that price even higher to be sure to get the home.
You may be wondering how a market could suddenly be flooded with a currency to increase supply and ultimately drive the price of the currency down. Well, that’s one role governments and central banks take when they want to impact the value of a currency.
Governments can also decide they want the value of their currency to increase, and they have the buying power to buy currency and make the availability of their currency scarce. This will make the price of the currency rise.
Government manipulation is not the only thing that can impact the value of the currency economically. The action of businesses and consumers as a whole can drive currency values up and down.
The key is to know which kind of market each country is facing and how that market is impacting the value of the currency. Remember that each currency trade involves at least two countries: the country of the currency you are selling and the country of the currency you are buying.